Ontario’s Electricity Subsidy Undercuts Conservation

Jun 14th, 2011 10:29 AM

Media Release

Toronto, June 14, 2011 - Ontario's Environmental Commissioner says the Ontario Clean Energy Benefit (OCEB) is a perverse incentive that could endanger the energy conservation savings the government is hoping to achieve.

In his Annual Energy Conservation Progress Report - 2010 (Volume One): Managing a Complex Energy System, released today, Gord Miller says "The 10 per cent rebate on electricity bills is an artificial subsidy on the price of electricity so it encourages consumers to use more." A study by energy analysts estimated that the OCEB could wipe out a third of the planned conservation savings over the next four years.

Miller praises the government for introducing time-of-use pricing that encourages households and businesses to shift their consumption away from periods of high demand, but noted that price subsidies undercut this development. Prices will necessarily rise because of a backlog of transmission investments and new generation projects. "Unfortunately, the government hasn't addressed the issue of rising prices in a way that prioritizes conservation," says Miller. "Instead it has continued the failed policy approach of the past where the government's only answer to higher electricity prices is to artificially lower electricity prices."

If the government feels the need to help consumers with the higher energy costs it could make the benefit a fixed amount, instead of tying it to consumption levels. "That way," says Miller, "the Clean Energy Benefit would be less of a disincentive to electricity conservation."

Miller is also concerned about delays in rolling out Ontario's important Conservation and Demand Management (CDM) programs. Between now and 2014, electric utilities, supported by the Ontario Power Authority, are supposed to reduce overall electricity use, as well as peak demand. "Province-wide conservation programs were all supposed to begin in January 2011," says the Commissioner, "but the delays mean we will miss opportunities this year."

The Environmental Commissioner is also questioning a recent decision by the Ontario Energy Board to freeze conservation budgets for Union Gas and Enbridge Gas Distribution, particularly at a time when the government has cancelled its own conservation programs for gas consumers. "The Board has too narrow a view about the benefits that will come with increased conservation. It is ignoring the avoided infrastructure costs and reduced greenhouse gas emissions that will come with reductions in consumption of natural gas."

The Environmental Commissioner of Ontario is the province's independent environmental watchdog. Appointed by the Legislative Assembly, the ECO monitors and reports on compliance with the Environmental Bill of Rights, the government's progress in reducing greenhouse gas emissions and its actions towards achieving greater energy conservation in Ontario.

Under the Environmental Bill of Rights,1993, the Environmental Commissioner of Ontario (ECO) reports annually to the Legislative Assembly of Ontario on the province's progress in energy conservation. Managing a Complex Energy System, the first volume of the 2010 energy conservation report, reviews policy developments that occurred over the year, highlights concerns with the current policy agenda and outlines recommendations to further conservation in Ontario.

The Long-Term Energy Plan

In 2010, the government restarted the development of the Integrated Power System Plan by issuing the Long-Term Energy Plan (LTEP) and a Supply Mix Directive. The ECO is pleased the government acted on a previous recommendation to establish electricity consumption targets in addition to peak demand reduction targets. This will reduce the need for new generating stations, transmission and distribution lines, and better reflects the design of many of the conservation programs available. However, the ECO feels the LTEP did not adequately explain the difficult trade-offs necessary when choosing among types of generation. Furthermore, the LTEP is an energy plan in name but is an electricity plan in reality. Ontario needs an energy plan and a multi-fuel conservation strategy that addresses all energy sources. (Page 11)

Electricity Pricing

Several changes in fiscal policy have affected the cost of electricity, including the 13% Harmonized Sales Tax (HST). As a result, electricity is now treated like other goods and services, sending a more accurate price signal about its cost. However, with the Ontario Clean Energy Benefit the government has essentially reversed the impact of the HST and restored an artificial price subsidy on electricity, creating a perverse incentive that undermines conservation. Changes were also made to the Global Adjustment to charge very high prices during a few hours of very high demand for large electricity consumers (more than 5 MW). This change is essentially a form of critical peak pricing. In general, the ECO supports this incentive to reduce peak demand and urges the government to expand critical peak pricing to smaller consumers and adjust some inequities in the allocation of costs in the Global Adjustment. (Page 21)

A New Conservation Framework

A new Conservation and Demand Management (CDM) framework for electric utilities has been implemented for 2011 to 2014. For the first time utilities have been mandated to meet conservation targets based on a provincial target of 1,330 MW and 6,000 GWh. The Ontario Energy Board (OEB) developed a CDM Code to govern the utilities' CDM activities. The ECO is concerned that the current CDM framework may discourage co-operation with other utilities or organizations and is unnecessarily restricting the role of utilities and their ability for innovation. The current CDM framework is set to expire on December 31, 2014. To ensure momentum is sustained a review and preparation for the next CDM framework should be completed before this end date. (Page 31)

Conservation Budget Freeze

On March29, 2011, the OEB announced that the conservation budgets for Ontario's natural gas utilities would be limited to their existing levels for the next three years. This was a surprising decision as both utilities and Board staff supported an increase in conservation spending. In addition, the Minister of Energy had also urged the OEB to consider expanding natural gas conservation efforts. The decisions of both the government and the OEB to restrict conservation spending will stall needed growth in conservation programs. (Page 39)

Smart Grid

Smart grid is the term used to describe the next generation of the electricity delivery system. Fundamental to this initiative is a two-way communication network that will allow consumers to more effectively manage their electricity use and also increase the opportunities for demand response and distributed renewable energy generation.

If the smart grid is to succeed, the ECO believes that one organization with a perspective of the electricity system as a whole should guide all organizations with grid-related responsibilities to the common goal of modernizing the smart grid. The ECO also feels incentives should be provided to undertake infrastructure investments that reduce distribution line loss to overcome the higher cost of efficient infrastructure and ensure that appropriate long-term system planning occurs. (Page 43)

Barriers to Alternative EnergySolar thermal systems, which use solar energy directly rather than convert it into electricity, are generally more energy efficient and deliver greater energy and cost savings than solar photovoltaic (PV)systems. The provincial government's cancellation of incentives to install solar thermal systems for homeowners, combined with the OPA's enticing microFIT program, has created a perverse incentive for homeowners to install solar PV systems over solar thermal. The ECO believes both types of technologies have value and both should be encouraged. (Page 53)

Recommendations:

The report makes the following recommendations:

1. The ECO recommends that the Ministry of Energy clarify how the peak demand and consumption targets contained in the Long Term Energy Plan and Conservation and Demand Management Directive are measured.

2. The ECO recommends that the Ministry of Energy build upon the work completed in the Long-Term Energy Plan and produce a comprehensive multi-fuel energy plan.

3. The ECO recommends that the Ministries of Energy, Revenue, and Finance improve the design of the Ontario Clean Energy Benefit so that any transitional assistance on electricity bills oes not act as a disincentive to conservation.

4. The ECO recommends that the Ministry of Energy initiate the next Conservation and Demand Management framework, which would include guaranteed funding, by January 1, 2014.

5. The ECO recommends that the Ministry of Energy clarify the appropriate roles of the government and gas utilities in funding natural gas conservation, with the goal of increasing overall funding.

6. The ECO recommends that the Ontario Energy Board encourage and facilitate smart grid investments that reduce line losses, putting these investments on an equal footing with conservation investments.

7. The ECO recommends that the Ministry of Energy adjust the relative financial incentives available for solar thermal and solar photovoltaic in residential buildings to appropriately reflect the economic and environmental benefits of each technology.